Gas pipeline rethink tangled in web of interests

For a while there, Datang International Power Generation (00991.HK, 601991.CN) was contemplating building its own natural gas pipelines rather than pay China National Petroleum Corp.’s (CNPC) excessive charges to channel the fuel from fields in Inner Mongolia to Beijing. That was until Datang was reportedly startled to realize that a deal between CNPC and Beijing municipal authorities gave CNPC the exclusive right to lay pipelines in the capital.

The deal meant Datang could not pipe directly to end-users and the company had no choice but to use CNPC’s network in Beijing at a cost of 2.8 yuan per cubic meter, or at least 400 million yuan (US$65.89 million) per annum, the Economic Observer reports.

It’s hardly a solitary case as CNPC controls 70 percent of China’s crude oil pipelines and 90 percent of its natural gas pipelines and ancillary facilities, stretching for more than 66,780 kilometers in total. The result is a massive network linking production bases with thriving markets that is largely closed to outsiders.

And apparently the energy juggernaut is milking the dominance for all its worth through subsidiaries such as Kunlun Gas Co., Ltd., which dominates the gas market in more than 100 cities with an annual capacity of 5 billion cubic meters.

But the corruption scandals engulfing former CNPC President Jiang Jiemin {蔣潔敏} and other senior executives since August have given regulators a rare chance to uproot CNPC’s seemingly unshakable monopoly.

Media reports say a draft scheme to revamp nationwide pipeline networks was distributed in October to a number of industrial players for comment. Those players included Datang, China Resources Gas (01193.HK), Towngas China (01083.HK), China Gas (00384.HK) and ENN Energy (02688.HK). The plan, to be implemented next year, proposes a mechanism to open CNPC’s pipeline networks to any third-party users on a fair-play basis and gradually pave the way for a new state-owned enterprise dedicated to the operation and management of pipeline assets, a source close to the National Development and Reform Commission said.

Analysts say organizers of the spinoff could take a page from the playbook of State Grid Corp. and Southern Power Grid Co., two electricity distributors founded in 2002 to overhaul the country’s power system. Electricity behemoths with businesses covering upstream power generation to transmission and distribution to end users were split into several independent entities.

But a National Energy Administration official was quoted as saying that the proposal to create a state oil and gas pipeline company is still just a preliminary idea, given that CNPC foots the bill to build most of its pipelines, which are owned and managed by various regional subsidiaries and entities under the CNPC umbrella. Any parties affected by a change would have to be compensated. Policymakers, he said, should also be mindful of the effects of rolling out any changes during winter, the peak season for gas consumption.

Also, the two other energy oligopolies, Sinopec Group and CNOOC, have mixed feelings about the move. While they hope to break CNPC’s monopoly, they are reluctant to loosen their grip on their own pipeline assets – Sinopec runs 6,000 km of lines from resource-rich Sichuan province to the burgeoning Yangtze River Delta while CNOOC has 3,000 km of liquefied natural gas lines in coastal provinces.

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